Money Buzz 11/04

Let's Make a Dual

If fear of losing control of your company is the only thing
stopping you from an IPO, then dual-class ownership probably sounds
like a great deal. In this public company ownership structure-which
has gained exposure since Google announced plans to use it in its
public offering-founders receive "supershare" stocks that
carry multiple votes, while the shares sold to the public carry one
vote each. Typically, a dual-share system is structured so the
founders retain a majority voting power, thereby retaining
operational control and insulating the firm from takeover
attempts.

But control bears a hefty price tag. "The market places a
real discount on firms like this," says Andrew Metrick,
associate professor of finance at the University of
Pennsylvania's Wharton School. "To retain control, you
could be looking at a 20 to 30 percent lower valuation."

Is it worth the sacrifice? "You have to ask yourself what
control is worth to you in dollar terms," advises Metrick. He
notes that investment bankers invariably discourage the structure
unless, as in Google's case, company founders rate
near-celebrity status. "It brings the value down, and it's
one more thing for them to have to explain to the [investing
public]."

Arrested Development?

Venture-backed small businesses shunned by the SBA's Small
Business Innovation Research Program (SBIR) in recent years may
soon benefit from new legislation. Enacted in 1982 as part of the
Small Business Innovation Development Act, the SBIR has helped
thousands of small businesses compete for federal R&D awards.
But in recent years, the program began to eschew startups with VC
backing and revoke awards already bestowed on such companies,
citing an eligibility requirement that mandates "51 percent
ownership by one or more individuals who are citizens of or
permanent resident aliens in the U.S."

"The genesis of the program was to spur innovation and
create economic development," says Mark Heesen, president of
the National Venture
Capital Association (NVCA). "Artificially restricting that
class of companies to only those that don't get venture
financing cuts off many very sound companies."

Help is on the way in the form of two stand-alone bills in
Congress (H.R. 4149.IH and S.2384.IS) as well as an SBA
reauthorization bill bearing corrective language. All three state
that companies owned in part by a VC operating company cannot be
exempted from SBIR participation, says Nancy Saucier, director of
the Medical Industry Group at the NVCA.

"The SBA is putting high-tech growth companies in a hard
position of choosing either venture backing or SBIR grants, when
what they really need are both," says Saucier.
"That's why we're fighting the hard fight."

To learn how to get an SBIR grant, check out the "Raising
Money" column in our upcoming January 2005 issue.